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Free Software, Real Profits

Will businesses continue swarming to open software?

Socially responsible investing begs the question: Is it financially viable? The same question arises with regard to free, or open source, software. Free software is clearly beneficial to society, but is it good for business?

Software is a lucrative, high-margin industry. Individuals and companies pay up when it comes to buying or upgrading software. Yet most people have never looked at the code for the programs they use. So when terms like "open source" and "free software" start getting thrown around, we should take a step back and make sure we know just what these terms mean.

Would you pay for a closed recipe?A cooking recipe is a set of instructions -- something you can change at will, copy as many times as you want and distribute to friends with the changes you made. Imagine you have a machine that takes a recipe and ingredients, and the food is ready an hour later without any help from you.

Suppose this really exists: You could write your own recipes, but they wouldn't come close to Grandma's famous orange cake recipe or any of Jamie Oliver's. Alternatively, you could buy "closed" recipes, to which you have no access; you couldn't see the steps, but you'd still get stunning results -- unless you don't like cilantro and it's a major ingredient.

Software as a recipeThat's how it works with software. We have a computer to "cook" for us, but we usually don't write the "recipes" – the software. We get it from various sources, either for free or for cash -- ranging from a dollar or so for your cool mobile app up to millions for high-quality corporate software.

Either way, we don't know what the code looks like -- we only see the output. That's why it's called closed software. We can't learn from it, we hope it does what we want, but it might have bugs, or do something differently than we expected. We're largely stuck with what we have.

Free as in beer, free as in freedomWhen software is given away for free, like those free apps, that's fun -- like free beer. However, the software is still closed, and you can't see how it does what it does, or how to change it. But when you have access to the code, and you're allowed to change it and redistribute it, then it is called free software -- free as in freedom.

The Free Software Foundation calls for the use of free software, "mak[ing] a political and ethical choice asserting the right to learn, and share what we learn with others." This allows knowledge to be shared more cheaply, easily and faster. It makes software accessible to everyone, lowering the economic barrier of entry for users and small corporations.

Open source: the shift to businessIn the late '90s, some software developers decided to rebrand free software as "open source," emphasizig the business potential of the sharing of source code. Many software companies rejected the open-source premise, due to fears of lost revenues and shrinking margins. But others saw a business opportunity to reach ever-growing markets, licensing the code in a different way. This new licensing scheme enabled repackaging of the open-source software with additional, closed code components for which companies could still charge high sums.

Making and saving money with open sourceIBM(NYSE: IBM), Google(Nasdaq: GOOG), and Red Hat(NYSE: RHT) are among the major players that have adopted the open-source paradigm. IBM makes gobs of money by selling high-end closed components packaged with open-source code, such as the Eclipse project. The closed, top-secret search engine gets Google's cash flowing, while web development components and the Android operating system increase Google's popularity. Anyone can download Red Hat's distribution of the Linux operating system -- the company makes its revenue from corporations that subscribe to Red Hat services, in order to receive full support.

Many companies, NGOs, and governmental agencies find Red Hat's model more beneficial than paying for every individual license of a closed operating system, such as Microsoft's (Nasdaq: MSFT) Windows. Similarly, organizations have been shown to save money by switching to free software. A recent study showed that companies can save up to 20% of their IT budgets by switching to the OpenOffice suite, sponsored by Sun (now Oracle(Nasdaq: ORCL)).

The Foolish bottom lineIBM, Google and Red Hat are not alone. Companies of all sizes and trades are adopting free software and enjoying its economic benefits. As Robert Frost said, "Freedom lies in being bold." Will you be bold? Tell us what you think in the comment box below.